The latest trends in mortgage fraud with Cotality fraud data

Mortgage refinance surge returns fraud risk to more normal levels, but risks still remain in many areas

Not much has gone the way the real estate and mortgage industry has wanted it to over the last few years, so it was welcome news to see that mortgage fraud risk, at least in one sense, is returning to “normal.” According to Cotality's most recent fraud report, 1-in-129 applications have signs of fraud risk. This marks more of a return to normal when compared to Q4 of last year when refinance volume increased 19% year over year and fraud risk also rose, increasing by 1.5%, according to Cotality data.

The flip in the causal relationship with both metrics rising was attributed to an increase specifically in real estate investor volume. Real Estate Investment lending, including DSCR (Debt Service Coverage Ratio) loans, can be riskier, so the increased investor activity late last year was one factor that pushed overall risk upward even in a refi-friendly environment. But that’s now changed, according to the Cotality Q1 2026 National Mortgage Application Fraud Risk Index.

Getting back to normal

With refi activity accounting for 41% of all lending activity in Q1 of this year, mortgage fraud risk decreased 9% compared to Q4 2025. This is the best performing quarter since Q2 2023. On a year-over-year basis, mortgage fraud risk was down 9.3% in Q1 2026.

This more normal refi inversion equation is welcome relief, as is the overall decline in risk, but that doesn’t diminish concern about fraud and the need to address it.

Undisclosed real estate debt rises with investor and multi-family segments driving more risk

The investor and multi-family segments continue to drive higher fraud risk, specifically in the Undisclosed Real Estate category. Undisclosed real estate can indicate hidden properties and undisclosed debt, as well as potential occupancy misrepresentation or derogatory credit events.

The report shows that in Q1, among the six fraud categories, only Undisclosed Real Estate showed a year-over-year increase (up 7.7%) while all others decreased: Identity (down 11.2%), Income (down 9.3%), Occupancy (down 8.3%), Property (down 2.3%) and Transaction (down 2.4%).

Real estate debt risk alerts are higher in the real estate investment sector  

Digging deeper, the report shows that increases in undisclosed real estate debt risk alerts are also higher in the real estate investment sector and are about 2.5 times more likely to occur than on owner-occupied loans. In Q1 of this year, Cotality estimates that 1 in 44 investment applications and 1 in 29 multi-family applications showed indications of fraud risk, which is significantly higher than the overall industry average for residential applications.

While alerts are not proof of fraud, they do indicate that fraud may be present.

Additionally, the report shows increased alerts in these areas, which also may correspond to increased real estate investment activity:

• Income (alerts up ~10%): High income that doesn’t align with the borrower’s age is a red flag.  
• Property: Prior sales within 12 months could indicate a possible flip (alerts up ~12%), and sellers operating under a corporate entity or LLC may warrant a transfer-history review (alerts up ~5%).
• Occupancy: Second homes within 25 miles of the current residence (alerts up ~10%) and primary refinances with a tax mailing address that doesn’t match (alerts up ~14%) are indications that occupancy fraud may exist.

Mortgage fraud is a fast-evolving challenge for lenders, particularly with the availability of AI tools that make it easier for fraudsters. Just when one area shows signs of improving, another trend or type of fraud gains traction. Still, mortgage professionals can celebrate even small victories as they continue to remain vigilant, relying on the industry’s best tools, in finding and preventing fraud.

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